Down with duties
Drastic tariff reductions on some 6,500 items were announced yesterday, to widespread applause from businessmen and consumers, writes Niveen Wahish
Customs duties have always been on the priority list of recommendations for economic reform, but no serious move in this direction was actually thought possible, and certainly not to the extent of the measures approved by the government this week.
On Tuesday, President Hosni Mubarak approved several steps aimed at simplifying customs procedures and cutting the average tariff rate from 14.6 per cent down to nine per cent on around 6,500 imported items, bringing down the customs ceiling from some 104 per cent to 40 per cent. Basic commodities such as sugar, oil, wheat and rice will enjoy the minimum tariff rate of two per cent.
The decision basically aims at making people's lives easier. It will mean cheaper prices for consumers and cheaper production inputs for manufacturers. It should also compensate for the spiralling increase in prices stemming from the depreciation of the pound by around 40 per cent since January 2003.
However, the president's decision will not only change tariff rates. It also involves reducing the number of tariff bands from 27 to six, and cancelling all imports customs service fees, which currently range between one and four per cent.
Full details of the decision were made public yesterday during a joint press conference that showcased unusually extensive cooperation between the various government departments. The press conference featured no less than three government ministers; namely the Minister of Finance Youssef Boutros Ghali, Minister of Industry and Foreign Trade Rashid Mohamed Rashid and Minister of Investment Mahmoud Mohieddin.
Production inputs got the lion's share of tariff cuts. "Eighty per cent of the reductions were on production inputs." said Rashid. The aim? to "provide the suitable environment for industrial establishments to produce quality goods at a low price", said Ghali.
The cuts received a warm welcome in many quarters. "It is a step in the right direction," said Taher Helmy, president of the American Chamber of Commerce and member of the National Democratic Party's Policies Committee. "This move will have a positive effect on the investment climate in Egypt."
At yesterday's press conference, Mohieddin highlighted that the primary complaint by investors had been with respect to the convoluted customs system.
Speaking specifically about the reduction in the number of bands, which he had strongly urged in an article in the previous issue of Al-Ahram Weekly, Helmy added that cutting red tape and bureaucracy, and clarifying and simplifying procedures means more transparency.
In the meantime, the reduction in tariffs is a dream come true for consumers and manufacturers alike.
According to Helal Sheta, deputy chairman of the exporters division at the Egyptian Federation for Chambers of Commerce (EFCC), this step ought to make Egyptian products more competitive: "Cutting tariffs and cancelling customs service fees will reduce the costs borne by manufacturers," he said.
Adham Nadim, a furniture manufacturer and a board member of the Federation of Egyptian Industries' furniture chamber, agrees with Sheta. "By virtue of the new decision, local manufacturers will be saved not only a lot of money but also a lot of trouble," Nadim said, adding, "This will ultimately translate into a better product exported at more competitive prices."
According to Nadim, the previous tariff distortions meant that in many cases it was cheaper to import finished wooden products than to manufacture the same items locally.
Lowering tariffs to a minimum on basic commodities may be of even more importance for the average consumer. As Youssef Boutros Ghali put it "the Egyptian consumer has the right to have a quality, low cost product."
However, some consumers remain sceptical that these cuts will be accurately reflected in retail prices. "Prices only go up, they are never reduced," said Nesrine Mohi, a housewife.
But this may not be the case this time. Khaled Hamza, chairman of the Customs and Imports Committee at the Egyptian Businessmen's Association (EBA), explains that consumers will need three months before they feel the impact on prices, when the inventory of products currently on the market is used up.
Moreover, Ghali pointed out that local traders will be forced to lower their prices to compete with the cheaper imports.
While the decision will keep consumers happy, it might upset some manufacturers whose products will face shoulder-to- shoulder competition with imported goods. Industries that are likely to be affected by cuts on import duties on finished items are the local textiles and car industries. Custom tariffs on cars with an engine capacity of 1600cc have been brought down dramatically from a steep 104 per cent to 40 per cent.
But this was an issue they were bound to have to address sooner or later. Some experts in fact believe that delays in exposing domestic entities to foreign competition only makes things worse for them, not better. "Local producers have to shape up, raise their quality and cut their costs," said Helmy. These efforts should, he added, go hand in hand with serious measures to modernise Egypt's industrial sector.
The slash in customs is a move that the government was reluctant to make in light of the expected loss in revenue. The decision will initially cost the government some LE3 billion in annual revenues. According to Central Bank of Egypt data, customs duties brought in some LE13.5 billion in revenue during fiscal year 2003/04. But the government hopes to make up for that by increased tax revenues due to the expected revival in economic activities.
Although this week's customs tariffs cuts have been viewed widely as a huge step in itself, Ghali promised that it will not be the last. Further cuts should be anticipated by next summer, he said. Furthermore, he promised a smoother and more efficient customs administration involving less inspection and quicker release of goods.
The customs reductions are part of a larger effort by the government to revive the economy through the reform of key areas such as the tax regime and investment climate.
Additional reporting by Mona El-Fiqi and Sherine Nasr